Yahoo (NASDAQ: YHOO) announced its results for September ending quarter after market close yesterday (Oct 15th). One look at the latest quarterly report will disappoint Yahoo investors while a detailed study makes the report an interesting one.
The revenue as well as net profit saw a dip on a Y/Y basis. The topline saw a dip of 5% whereas the bottom line adjusted for one-time gains and losses fell by 27% Y/Y. While the performance of the business isn’t significant in itself we would like to highlight a few, but important positives from the report. The company reported non-GAAP earning per share (EPS) of $0.34, marginally above analyst expectations of $0.33. The company reported a negative in most of the important indicators of business performance. However a closer look at the report reveals some interesting facts.
Key positives from the quarter
The company did report encouraging trends in numbers which are critical to the company’s core business of online advertising. The display ads sold on the Yahoo properties saw a jump of 1% on a Y/Y basis while the paid clicks sold through Yahoo search services saw a significant jump of 21% Y/Y. The revenue per ad and the revenue per click saw a dip of 7% and 4% respectively. Hence the increase in the number of ads sold and paid clicks did not translate to topline growth. However at this point in time we think it is more important for the company to increase its volumes as the company is actively working on developing an engaging user experience which will drive up the revenue per user in the coming quarters. Yahoo has been pursuing an aggressive acquisition strategy to develop engaging online properties which will enable the company to generate greater revenues in the future. Therefore a key question will be whether or not the company can finance its aggressive acquisition strategy and as to how long it will be able pursue such a strategy.
Yahoo spent close to $163 million in acquisitions in Q3 2013 and also bought back stock worth $1.7 billion during the quarter. However the company ended the quarter with cash and cash equivalents balance of $1.83 billion, a significant number by itself but down from the year ago balance of $8.4 billion. Therefore the company’s strategy of inorganic growth may be under risk considering the cash burnout rate. However the company is on the verge of a cash windfall which will result from the Alibaba stake sale.
Another important announcement coinciding with the company’s quarterly report was the reduction in the stake to be mandatorily sold at the time of Alibaba IPO. Yahoo was originally supposed to sell half of its current holding at the time of Alibaba’s IPO, which is most likely to happen in early 2014. However Yahoo yesterday announced a new agreement under which it will sell only 208 million shares representing a total 9.5% stake in Alibaba. Using our optimistic valuation of Alibaba, at $82.5 billion, the stake sale will result in an after tax cash flow of $5.11 billion for Yahoo. The cash windfall can be expected to finance Yahoo’s strategy until Marissa can set its core business in order and drive up the revenues from the core business.
Another important impact of the new stake sale agreement with Alibaba is that due to an increased holding in Alibaba post-IPO Yahoo will benefit from the increase in value of Alibaba. While we used a conservative estimate of $82.5 billion to calculate value of Yahoo’s Alibaba stake, the Chinese internet company is expected to hit the bourses at a valuation of $100 billion, increasing the value of the Yahoo stake to that extent.
In conclusion we would like to say that though the quarterly numbers by themselves do not suggest an attractive bet for investors, we think the quarterly performance fits in perfectly with the long term strategy of the company. The gains from the Alibaba stake sale will finance the strategy to turnaround the core business of the company and we believe the increasing number of visitors that Yahoo is seeing is the first step in the company’s turnaround. The company reported 800 million monthly visitors to Yahoo properties in its Q3 2013 report, up 20 % over the last 15 months. We see the stock as an attractive long term investment even though the quarterly numbers may not suggest the same at first glance. Yahoo stock moved up 1.86% in pre-market trade after closing September 15 trading session at a price of $33.38, registering a one day fall of 1.82%.
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